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Tuesday 20 November, 2018
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Home Regulation and Ethics Further Hurdles for Regulatory Approval of Notifiable Mergers in South Africa

Further Hurdles for Regulatory Approval of Notifiable Mergers in South Africa

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Kathryn Lloyd

On 12 July, the Competition Amendment Bill was introduced in Parliament, substantially revising the earlier version of the Bill. One of the most significant changes is the introduction of a new Section 18A, which would allow for an additional review process for mergers that would have an adverse effect on national security interests.

In addition to the competition authorities’ review process, a Committee constituted by the President, or a Cabinet Member to which the President delegates authority, would consider whether a merger involving a foreign acquiring firm has an adverse effect on South Africa’s national security interests. The Committee would comprise Cabinet Members and other public officials appointed by the President.

The President is also tasked with publishing a list of national security interests, including the markets, industries, goods or services, and sectors or regions. In compiling that list, the President must have regard to a broad range of factors, including the effect of a merger on “the supply of goods or services” to either citizens or government and the “economic and social stability of the Republic”.

It appears that a favourable decision by the Committee would be a pre-condition to a complete filing with the Commission and the competition authorities would not be able to approve a merger if the Committee has prohibited it, effectively ousting their jurisdiction to deal with such mergers.

The amendment specifies that the Committee must make a decision to either approve the merger, with or without conditions, or prohibit it, within 60 days of notification to it. The Committee may consult with the Commission during its deliberations and would submit its assessment report to the National Assembly.

The amendment contemplates that the President will issue regulations governing the processes and procedures of the Committee and access to information regarding the merger, which would no doubt clarify a number of open issues.

  • The factors that the President would take into account when determining national security interests are very broad, and include not only the typical interests of defence, foreign surveillance and terrorism, but also interests that are more indirectly related to national security.
  • It is not clear how parties would determine whether the merger they contemplate falls within the scope of the national security interests and if there is a materiality threshold – the present wording of “may have an adverse effect on the national security interests of the Republic” is extremely broad.
  • The review period for affected mergers will be significantly extended, especially as there is an opportunity for the Committee to extend “upon good cause shown”.
  • Because “acquiring firm” is broadly defined in the Competition Act, the scope of what is meant by a “foreign acquiring firm” may be over-broad. In particular, the amendment would capture mergers between foreign acquiring and foreign target firms and not only mergers between foreign acquiring and local target firms, even though foreign-to-foreign mergers usually have fewer direct implications for South Africa.
  • The grounds, criteria, methodology and supporting evidence for evaluation are all unknown. Another uncertainty is the type of remedy that may follow if the Committee identifies a national security interest concern. This uncertainty might result in a disincentive to a broader category of investment than the drafters of the amendment intended.
  • National security interests are likely to be policy issues that have nothing to do with competition or the existing public interest grounds, and the provisions might therefore be misplaced in the Competition Act.
  • The amendment does not contemplate an appeal process – the decision of the Committee is effectively final, with unclear implications for global mergers.

Although the amendment in its current form appears to be very broad in scope, the Minister of Trade and Industry has indicated in a recent article that the section is intended to apply, for example, in the hypothetical case where a foreign arms manufacturer merges with or acquires a local arms manufacturer.

While similar review processes occur in other countries, including Canada, the United States and the United Kingdom—notably, in separate legislation to the competition legislation—typically the scope of those sections is limited by a materiality threshold and participation by the competition authorities. It seems that, under its current wording, the amendment might be capturing mergers with a wider net than necessary to achieve its purpose, although the Regulations might well remedy this concern.

The amendments are scheduled for debate in public hearings before Parliament on 28 and 29 August 2018.